Essay about Measuring the Macroeconomic Impact of Monetary Policy

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Monetary policy is the method by which the government, central bank, or monetary authority controls the supply of money, or trading foreign exchange markets. This policy is usually called either an expansionary policy, or a contractionary policy. An expansionary policy multiplies the total supply of money in the economy, and a contractionary policy diminishes the total supply. Expansionary policy is used to tackle unemployment in an economic decline by lowering interest rates, while contractionary policy has the goal of elevating interest rates to fight inflation. Monetary policy reposes on the relationship between the rates of interest in an economy and the total dispense of money. Monetary policy uses a diversity of tools to…show more content…
Banks keep these reserves as cash in their vaults or as deposits with the Fed, which they are required to do. The Fed has the authority to set reserve requirements on checking accounts and certain types of savings accounts. Discount rate is the interest rate that the Fed charges banks for short-term loans. Banks can borrow reserves directly from the Federal Reserve and the discount rate is the rate that financially solvent banks must pay for this credit. Changes in the discount rate typically occur together with changes in the federal funds rate. Monetary Policy and its effect on Gross Domestic Product Gross Domestic Product (GDP) is the total market value of all final goods and services produced in a given year (McConnell 2004). This is one way of measuring the size of the economy. It is usually compared to the previous quarter or year. Economic growth is calculated as a percentage rate of growth per quarter (3-month period) or per year (McConnell & Brue, 2012). Goals of Federal Reserve policy are to maximize employment and keep inflation on a descending track until price stability is accomplished. Economic growth promotes employment, which in turn helps the economy. An economy that is experiencing economic growth is better able to meet people's wants and resolve socioeconomic problems. Rising real wages and income provide richer opportunities to individuals and families—a vacation trip, a personal
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